Home Loan Down Payment

Your home loan down payment is an amount you pay upfront to a bank or NBFC. The payment is represented as a token or percentage of the home’s total purchase price. The remaining balance of the purchase price is then funded using a home loan or mortgage. 

The down payment has a significant impact on the eligibility of your home loan. 

It also plays a crucial role in determining the terms of your home loan as it has a direct impact on the loan amount offered to you. For example, if you pay about 30% of the property’s value as a down payment, you can get a home loan for the remaining 70%. Furthermore, the interest rate is charged only on the amount borrowed. This affects your EMIs and total repayment costs.

Prior to sanctioning your home loan, your chosen lender will carry out a complete evaluation of your home loan’s application and the required documents.

The lender will assess some key factors of your application, which are as follows:

• Age
• Income
• Credit score
• Existing loans (if any)
• Nature of occupation or business
• Income tax returns
• Value of property

Now based on the above factors, your lender can notify you about the maximum home loan amount that you are eligible to get. Keep in mind that there is only a portion of the property’s cost that you need to pay the seller upfront.

You can check your eligibility and your EMI with the home loan eligibility calculator and home loan EMI calculator on Bajaj Markets respectively. 

According to the RBI, banks and NBFCs in India can only provide up to 75% of the property value as a home loan for loans above ₹75 Lakhs. The rest should be funded by the borrowers themselves as a down payment. If the loan amount falls between ₹30 Lakhs and ₹75 Lakhs, the individual can borrow up to 80% of the property value. 

For an amount lower than ₹30 Lakhs, the lenders may provide up to 90% of the property value. In such cases, the borrower is required to pay the remaining 10% as a down payment. Thus, as the property value increases, the home loan down payment percentage also increases.

Generally, lenders give you options to pay a minimum amount as a down payment. But, you can also opt for a larger amount, if you can afford it.

Let us take a look at the pros of making larger down payments:

• Lowers the overall loan amount, which could fetch you a lower interest rate. This is subject to the lender's policies  
• Ensures you own the property’s larger equity. This lowers your dependence on borrowed funds.
• Increases the chances of a faster loan approval

Enables you to enjoy potential discounts in processing fees and home loan insurance premiums. These are usually offered by lenders as additional perks to borrowers who make high down payments.

Here are some reasons why you should consider opting for a minimal down payment:

• You can tackle any emergency that may arise with the amount you save on a down payment
• You have the option to allocate the saved amount towards various investment opportunities
• As the principal and interest amount of your home loan increases with a minimal down payment, you can enjoy greater tax benefits
• Making a minimal down payment leaves you with more funds for repairs, renovation, interior decor, etc.

You may face concerns while arranging for funds to pay your down payment, considering the soaring property prices. Have a look at the various challenges you may face with respect to your home loan down payment:

• Personal Contribution Required: You need to fund a portion of the property’s cost from your own savings (usually at least 10%), while the lender covers the rest.
  

• High Financial Burden: Saving for the down payment can be challenging, especially with ongoing financial commitments and the rising cost of property.
  

• Saving for the Down Payment: It may take considerable time to save enough money for the down payment, particularly for first-time homebuyers or those with limited income.
  

• Effect of Market Conditions: In a rapidly increasing housing market, it becomes harder to save for a down payment, as property prices may rise before you're able to gather the necessary funds.
  

• Funding Limitations: While down payment assistance programs exist, they may have strict eligibility criteria and may not provide enough funds to cover a large portion of the down payment.
  

• Lender Requirements: Some lenders have strict down payment criteria, which could make it difficult to qualify for the loan, especially in higher-risk cases.
  

• Increased Loan-to-Value (LTV) Ratios: A lower down payment could result in a higher loan-to-value ratio, increasing monthly payments.
  

• Balancing Other Financial Goals: Saving for a down payment while keeping up with other financial priorities (e.g. retirement, emergency fund) can be tough for many borrowers.
  

• Challenges for First-Time Buyers: First-time homebuyers, lacking proceeds from the sale of a previous home, may struggle more to save for the down payment.
  

• Changing Lending Criteria: Lenders may adjust their down payment requirements based on market conditions or policy changes, making it difficult to predict the exact amount needed.
  

These delays ultimately result in getting caught further more in the rising costs of property. But the silver lining is that there are always ways and means to easily fund your down payment, if done thoughtfully.

In order to make a down payment, it is important to plan your finances well in advance. Here are some tips to help you make a down payment without straining your finances.

• Start Early

The most practical and safe way to accumulate funds for your home loan down payment is to start saving money well in advance. Initially, you could start by investing your savings in high-return investments. Later, transfer the gains to a safer investment option like fixed deposits. Ensure to always maintain a budget and keep your expenses on track.

• Utilise Investments

Investments like FD and mutual funds can be used to fund the down payment of a house. If you fall short of the amount for the down payment, you can withdraw a part of the investment. Or else, you can get a secured loan against these investments. 

• ‘Proportionate Release’ Option

Some lenders offer this option for new construction projects promoted by select developers. Herein, you can pay the down payment in small amounts over time instead of making a lump-sum payment. Thus, you can pay your down payment in installments as the construction of a property may take a few years. Accordingly, the lender releases your home loan disbursements.

Whether opting for a larger or minimal down payment, ensure it aligns with your financial stability and requirements.  

It is helpful to know the various ways by which you can save up for making your home loan down payment:

• Set achievable goals: It is always smart to proactively think about when you wish to purchase your home. This helps you start researching properties in advance and compare their prices to get an estimate of your purchase cost. Remember to take inflation into account. This ultimately helps you save up for making your home loan down payment in the future.
  

• Maintain a budget: Start preparing your budget on the 50/30/20 rule. Allocate the first 50% on essentials like electricity bills, water, insurances, rent and more. The next 30% will be set for personal wants like dining out, shopping, travel and more. The final 20% will go to other miscellaneous savings and investments. Ensure that you stick to this budget with full sincerity.
  

• Automate your savings: You can also save up for your future down payment on the home loan by creating a new savings account. Make a request to your bank to start automating money transfers from your existing account to your newly made account. This really helps ensure a regular saving timeline so you can purchase your house in the future.